Have the feds put the right price on carbon?

An economic analysis suggests that the US government's estimate is way too low.

When the US government formulates a new environmental regulation, it typically performs a cost-benefit analysis of the expected impact of the changes. These calculations can be rather complex, as things like regulating pollution exact a cost on the polluters, but may save money for society as a whole. In 2007, a court ruled that the government needed to establish a price for carbon emissions (technically, the National Highway Transportation Traffic Safety Administration was ordered to do so when formulating new fuel efficiency standards). By 2009, the Obama administration had convened a multi-agency panel to come up with a standard value to be used by all federal agencies. The group produced a range of values, but came up with a central figure that it recommended all agencies use: $21 per metric ton of CO2.

A new, open access publication has now taken that estimate to task, with its authors complaining that the feds were far too simplistic about setting a price on carbon. Their analysis suggests that the cost of carbon should be at least twice that, and possibly over 12 times higher.

The study's two authors are based at the National Resource Defense Council and Cambridge University. And, even if you don't agree with their analysis, the study remains an interesting read because it does a good job of describing why putting a price on carbon is a real challenge. As expected, the results naturally depend strongly on the assumptions that you make, showing that small differences in assumptions could have a huge impact on policy.

The initial process of setting a price on carbon isn't very different from that of projecting climate change itself. Emissions scenarios (continued emissions, stabilization by 2050, etc.) get plugged into a climate model, which can project what the world will look like at various dates. The economic costs to humans, in terms of things like impacts on health, loss of infrastructure, changing agricultural zones, etc. can then be calculated using an economic model. All of these processes involve uncertainties, so the models are run thousands of times with slightly different values to get a range of uncertainties.

These models have a number of weaknesses. For example, they can't consider unforeseen technological innovations, such as an efficient means of carbon capture and storage. At the same time, there are things are already causing problems—ocean acidification being one of them—that aren't factored in at all. On the whole, the authors say, the process is widely viewed as underestimating the costs of current emissions.

In any case, this process can provide an estimate of the costs that can be avoided by preventing emissions now, putting a price on carbon. But then the fun starts: these costs are borne now, while the benefits will be received in the future. Adjusting for this requires calculating what's called a "discount rate," which reflects the fact that the money spent on controlling emissions could have been put to other uses, even if it's only earning interest.

This is where some of the simplicity of the US government analysis comes into play. Rather than trying to figure out what discount rate is likely, it simply picked a set of potential returns: 2.5, three, and five percent. It was the middle of these that put the $21/metric ton price on carbon.

One obvious problem with this that is pointed out by the new paper is that current rates of return appear higher than they should be because many externalities aren't priced into economic growth. But that's not the only problem with the government's approach—it also ignores other work in this field.

Economists have already developed a formula for calculating discount rates. It includes a factor that compensates for the fact that, as incomes grow over time, the savings experienced in the future will have less value, since they'll be a smaller fraction of the total income. But it also includes one that adjusts for the fact that most people will probably be willing to bear some costs now in order to keep from eliminating resources needed by future generations. As the authors note, the only reasons for ignoring this factor that's been proposed is "the unlikely possibility that the human race becomes extinct in the future (for a reason unrelated to climate change)."

Another complicating factor that's not considered by the government is that the impacts of climate change will frequently be most severe on the poor, both in terms of nations and individuals. Given that, even smaller costs will have an oversized impact on basic living conditions.

In general, the authors clearly feel that the middle-of-the-road three percent value used by the US government is too high, and largely based on the rate of return from risk-free bonds, rather than a careful analysis. They also point out that the EPA (which was involved in setting this value) had surveyed rates used by other organizations and countries, and found that three percent was the highest typically used (many values, in fact, were less than half that). Dropping to a rate of two percent would more than double the price of carbon (to $62/metric ton), while a value of 1.5 percent would raise it to $122. Using the more sophisticated method of calculating the discount rate could, depending on assumptions, produce a value over 12 times the $21 figure recommended by the US.

What are the consequences of these higher values? It would only take a price on carbon of $52/metric ton to make photovoltaic power economically competitive with coal, something that is only currently true for natural gas and wind (based on Department of Energy figures that don't include a price on carbon). If the cost went up to $74, then wind would be competitive with natural gas, too.

Clearly, this is a case where there is no one right answer, and even the best estimate will involve a number of assumptions. But the authors of the paper have made a compelling case that the US government could have been a lot more sophisticated in its analysis, and that small changes in the approach used could have a very large effect on policy.

Promoted Comments

2) Why call it "discount rate"? It already has a name: "opportunity cost."

They're two different concepts.

The 'discount rate' is how money loses value over time - a formalized way of expressing that a bird in the hand is worth two in the bush. If you stuff a $1 bill in your mattress, it will be worth a lot less in purchasing power 10 years from now - the ratio of what it's worth now compared to the future is the discount rate.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

125 Reader Comments

With this in mind, it's not surprising that the emisisons analysis done by the US government comes under scrutiny. It just surprises me that the criticism is that the price of carbon is considered by third parties to be too low, rather than too high. I would have expected it to be the other way around.

I think the article answers why it's so low, because then the renewable energies would actually be competitive, and we cant have that can we!

Clearly, this is a case where there is no one right answer, and even the best estimate will involve a number of assumptions.

So what you're really saying is, this is a case where one can adjust the assumptions to create an answer that suits any possible personal agenda. And upon this basis we create an entirely new class of taxes?

I'm firmly in the anthropometric warming camp, but cap-and-trade is NOT the answer. It's just another means to funnel more revenue into the government coffers. Nothing more, nothing less.

The article is not well thought out. Please elucidate on the following

1) What is the connection between the price of carbon and the price of CO2?2) Why call it "discount rate"? It already has a name: "opportunity cost."3) Is the interest compounded? If so, what is the amortization period?

Minor quibble:

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it simply picked a set of potential returns: 2.5, three, and five percent. It was the middle of these that put the $21/metric ton price on carbon.

If effort is made to textualize the quantities, be consistent. "Two-point-five" is perfectly valid. But many of the other quantities are still specified with digits.

With this in mind, it's not surprising that the emisisons analysis done by the US government comes under scrutiny. It just surprises me that the criticism is that the price of carbon is considered by third parties to be too low, rather than too high. I would have expected it to be the other way around.

I think the article answers why it's so low, because then the renewable energies would actually be competitive, and we cant have that can we!

With this in mind, it's not surprising that the emisisons analysis done by the US government comes under scrutiny. It just surprises me that the criticism is that the price of carbon is considered by third parties to be too low, rather than too high. I would have expected it to be the other way around.

I think the article answers why it's so low, because then the renewable energies would actually be competitive, and we cant have that can we!

Artificially competitive, but why should that matter?

Coal has an artificially low price.

Wow, I did not know that. Given high demand? Multiple sources? Really?

Do you have a source pointing to coal subsidization? I'm quite interested (and no, I'm not being sarcastic).

2) Why call it "discount rate"? It already has a name: "opportunity cost."

They're two different concepts.

The 'discount rate' is how money loses value over time - a formalized way of expressing that a bird in the hand is worth two in the bush. If you stuff a $1 bill in your mattress, it will be worth a lot less in purchasing power 10 years from now - the ratio of what it's worth now compared to the future is the discount rate.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

Money is what puts food on your table and keeps the lights on. Go talk to people living in primitive conditions in the Third World and see if they agree with your assessment of money being irrelevant.

It just seems irrelevant to you because you've spent your life coddled by systems that just work without you bothering to understand their nature. Your power, heat and sustenance seem to magically appear when in truth they are the products of a complex system operated by money.

Of course, the article itself has the same sort of magical thinking underlying it. Studies such as mentioned in the article are generally only correct by accident because there is absolutely no incentive for the authors to let honesty outweigh their bias - the result was determined by policy preferences rather than outcome.

Even when the incentives make it likely that the modelers are aiming for a legitimate result rather than an act of salesmanship, such studies are incredibly difficult to conduct properly.

Well said, sir. I'm frequently boggled by people who actually try to say money and commerce are irrelevant or inherently evil, typed into their smartphone over their Jamaican latte, on their way to the grocery store.

2) Why call it "discount rate"? It already has a name: "opportunity cost."

They're two different concepts.

The 'discount rate' is how money loses value over time - a formalized way of expressing that a bird in the hand is worth two in the bush. If you stuff a $1 bill in your mattress, it will be worth a lot less in purchasing power 10 years from now - the ratio of what it's worth now compared to the future is the discount rate.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

Agreed, but by that logic, losing value over time has a very well-known name: inflation.

This is the first time I've heard the term "discount rate" applied in such a context.

Wow, I did not know that. Given high demand? Multiple sources? Really?

Do you have a source pointing to coal subsidization? I'm quite interested (and no, I'm not being sarcastic).

Even ignoring direct subsidies, the market price of coal does not come close to reflecting the expenses incurred by using it. These expenses (costs to the environment like climate change, mercury contamination, personal health, etc.) are not factored into the asking price or figured into the cost to the industries of burning coal for power. This is called a negative externality. Estimates for the US consistently put these externalities in the rage of 100-500 billion dollars per year.

2) Why call it "discount rate"? It already has a name: "opportunity cost."

They're two different concepts.

The 'discount rate' is how money loses value over time - a formalized way of expressing that a bird in the hand is worth two in the bush. If you stuff a $1 bill in your mattress, it will be worth a lot less in purchasing power 10 years from now - the ratio of what it's worth now compared to the future is the discount rate.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

Agreed, but by that logic, losing value over time has a very well-known name: inflation.

This is the first time I've heard the term "discount rate" applied in such a context.

No, inflation is a different concept altogether, though it has the same principle. "Discount rate" is an extremely common term in finance and is almost always used in any sort of long-term cost analysis. Discount rate is, by definition, i/(1+i) where i is the interest rate, and there are certain benchmark interest rates that are used. This is separate from inflation, which is based on cost of goods and not set by financial entities.

When on Earth have you ever seen the the Feds not under-estimate the cost of anything???

The under-estimation was on purpose, with deliberate intention to deceive.

Any kind of cap & trade system will end up creating a massive new economy that will not do anything to actually address environmental concerns, but boy will it sure spread money around like nobody's business.

Even ignoring direct subsidies, the market price of coal does not come close to reflecting the expenses incurred by using it. These expenses (costs to the environment like climate change, mercury contamination, personal health, etc.) are not factored into the asking price or figured into the cost to the industries of burning coal for power. This is called a negative externality. Estimates for the US consistently put these externalities in the rage of 100-500 billion dollars per year.

An externality is a cost imposed on a third party unrelated to the transaction. If I open a nightclub next to your home, I impose an externality of noise pollution on you since you suffer the noise pollution without gaining the benefits of the nightclub (we'll assume you don't visit the nightclub here).

A non-monetary cost is a cost over and above what you subtract from your bank account when you purchase a product. When you buy a candy bar, you're also paying a cost in terms of your expanding waistline. But this cost is not reflected in the dollar price of the candy bar.

Since essentially everyone is involved in the transactional structure for coal power, none of us can really claim to be an uninvolved third party. We're just paying non-monetary costs for the use of coal power.

The only consequences are that other forms of power are suddenly competitive? I'm not trying to debate Global Warming or whatever, but that answer seems a bit too simple as well.

They become competitive because you've raised the cost of conventional power substantially, apparently out of concern that the poor will be affected by climate change but will be completely insensitive to substantially increasing the cost of living. Maybe it's just me, I don't get it.

I guess what I'd like to see is an estimate of how this would impact my electric bill. How much extra is the average American going to pay per month?

I have no idea what a metric ton of carbon is or what it looks like - I'm not going to be paying for it directly. Though if they do up prices, maybe I do want my bill to highlight how much extra I'm paying because of the cost of carbon.

The only consequences are that other forms of power are suddenly competitive? I'm not trying to debate Global Warming or whatever, but that answer seems a bit too simple as well.

They become competitive because you've raised the cost of conventional power substantially, apparently out of concern that the poor will be affected by climate change but will be completely insensitive to substantially increasing the cost of living. Maybe it's just me, I don't get it.

Never heard of market forces? The whole concept is that instead of paying more for coal AND suffering the consequences of its use, the market will invest that money in carbon-neutral alternatives. Remember too, the value produced by the burning of coal isn't being destroyed. The money collected under a carbon tax goes somewhere. Currently I'd assume that somewhere would be continuing to pay for existing entitlements. The net impact to the poor is thus zero. It is in fact quite clear that the WEALTHY will have to pay (who else is there to pay?) which is why it hasn't happened.

2) Why call it "discount rate"? It already has a name: "opportunity cost."

They're two different concepts.

The 'discount rate' is how money loses value over time - a formalized way of expressing that a bird in the hand is worth two in the bush. If you stuff a $1 bill in your mattress, it will be worth a lot less in purchasing power 10 years from now - the ratio of what it's worth now compared to the future is the discount rate.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

Opportunity cost simply follows the fact that if you spend money on one thing, you cannot spend the same money on another thing (another 'opportunity'). It isn't about misallocation per se, and doesn't compare 'actual' to 'ideal' in the sense you suggest, except in the sense of maximising utility (it is a microeconomic concept, not a macroeconomic one).

Even ignoring direct subsidies, the market price of coal does not come close to reflecting the expenses incurred by using it. These expenses (costs to the environment like climate change, mercury contamination, personal health, etc.) are not factored into the asking price or figured into the cost to the industries of burning coal for power. This is called a negative externality. Estimates for the US consistently put these externalities in the rage of 100-500 billion dollars per year.

An externality is a cost imposed on a third party unrelated to the transaction. If I open a nightclub next to your home, I impose an externality of noise pollution on you since you suffer the noise pollution without gaining the benefits of the nightclub (we'll assume you don't visit the nightclub here).

A non-monetary cost is a cost over and above what you subtract from your bank account when you purchase a product. When you buy a candy bar, you're also paying a cost in terms of your expanding waistline. But this cost is not reflected in the dollar price of the candy bar.

Since essentially everyone is involved in the transactional structure for coal power, none of us can really claim to be an uninvolved third party. We're just paying non-monetary costs for the use of coal power.

No, you misunderstand the terminology. The external cost of (untaxed) carbon emissions are born by society, who are not party to the transaction. This is normal use of 'externality' in environmental economics, and economics generally.

Inflation is where everything costs more.QE are pumping more money into the system.

Private industry is sitting on stacks of money (Trillions), and how do we get them to move some of that? By giving them handfuls more?

The American economic system is broken (maybe broken isn't the right work, but it isn't working properly). We need inflation to give impetus to not sit on the cash. Really the cost of inflation to sitting on it is low. What is there to spend it on? Workers are getting paid less as there is excess supply. Risk it? Nah, might buy someone out for more consolidation. Taxes are low, loopholes are high there are little need to spend it.

Inflation seems unlikely as labor is cheap and everything else remains the same. We just have too much money in corporate coffers and not circulating. Hand them alot more? To do what with? They are sitting on stacks.

Labour reform maybe? To increase the strength of bargaining.Tax deposits of corps? There would be much howling.

What other options does government have? Just keep pumping money into the system to get things to get a little moving? Keep giving corporations money to keep buying themselves out? Seems a little silly.

Inflation is where everything costs more.QE are pumping more money into the system.

Thats actually one and the same. By printing more money into the system the prices of everything else rises because the number of widgets has remained static but the number of paper dollars has increased. Usually the first widgets to respond are commodities and necessities, and this is exactly what we have observed with each round of QE, ahm, money printing.

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What other options does government have?

Govt should enforce level playing field, and not play favorites to too-big-to-fail, ahm, to-big-not-to-take-bribes-from. Excessive debt is what caused the problem. More debt will not solve it, only make it even worse which is exactly what we are observing.

Regarding carbon tax - its just another idea to transfer money into non-productive wall street pockets.

All the people talking about the impact of carbon pricing on low-income brackets seem to be ignoring that most realistic policy proposals include assistance plans or services that reduce or even wipe out the cost to these brackets. Subsidies for energy to the poor, reinvestment in local programs that ease the burden or improve efficiency, etc. etc. In the real world, a carbon pricing policy will not ignore the people who can barely afford power as it is.

Which just means those just above the magic cut off figure, the upper poor or lower middle class (however you want to define them) will be even more impacted as the costs for the poor are shouldered by them and those who are more wealthy. That is the real problem with these proposals, the Obama administration's first proposal would have resulted in ~$3000 loss of income a year. This did not take effect in the first year but was phased in over a couple of years. Even as it is gradually phased in, it would result in tremendous pain to the lower middle class and especially families. For them losing $3000 a year would be devastating. The Obama plan did include subsides for the poor. Lower middle class were screwed.

Based on some hasty calculations from the first google result I could find, it takes roughly 1 pound of coal to generate 1kWH, which nets 2.16 pounds of CO2, which is .00098 metric tons, or a surcharge of just over $0.02 / kWH for coal-fired electric.

Per a fueleconomy.gov link, a gallon of gasoline generates some 20 pounds of CO2, or 0.009072 metric tons, which would be a surcharge of $0.19 / gallon.

Perhaps someone can devise some more accurate figures. I wouldn't bet a lot on mine.

An 'opportunity cost' is the cost incurred by misallocating your money. If I blow $100 on hookers & beer, that's $100 I didn't spend on making the world a better place. The difference in value between the ideal use and the actual use is the 'opportunity cost'.

The way I was taught 'opportunity cost' is that it's not so much misallocating your money. You invest in something that ties up your capital. During this time, you won't be able to invest in the next best alternative. The next best alternative is the opporunity cost.

So if I blow $100 on hookers & beer, the opportunity cost would be value of coke and strippers that I could have bought with that money.

That said, I've really only learnt Economics 101 from College so your explanation might be better.

I guess what I'd like to see is an estimate of how this would impact my electric bill. How much extra is the average American going to pay per month?

Also of interest is what will happen in areas where most power is generated conventionally (coal or gas), customers in these areas will be most impacted.

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I have no idea what a metric ton of carbon is or what it looks like -

What is meant is CO2 (as was mentioned in another post), you can't see it.

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I'm not going to be paying for it directly.

But that's the entire idea of a carbon market.

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Though if they do up prices, maybe I do want my bill to highlight how much extra I'm paying because of the cost of carbon.

That would be a good idea, so I'd not expect it to happen.

For the US the figure is about 17 tons/capita/year. So at $20 a ton you'd pay $340 a year/person, which is certainly not insignificant. Of course the lower you are income-wise the less you probably use and the less you'll pay. I don't have figures on that, but the difference is probably rather significant.

However, again, there are other factors here. This money doesn't go down some drain somewhere. Assuming it went to the general treasury of the US it would logically lower your tax bill by the same amount (though honestly at this point we'd probably have to use it to bail our asses out of hock, but that's a whole other story and will happen one way or another anyway). My guess is since the low income people generally net out on the plus side in the tax/outlay equation that they'll AT LEAST break even on this deal, probably come out ahead.

I don't think the market approach to controlling CO2 works, and I just see this as the government establishing a new tax revenue source which will likely fund other things and not controlling CO2 emissions.

This artifical trying to manipulate the market to make inefficient forms of power generation more competitive is doomed to fail because it doens't address the real problem of why they are uncompetitive. All that is going to happen is that the tax/fee will be passed down to consumers and the same dirty power plants will still be used.

No, it is the current externalized cost (the environmental damage done by fossil fuel use) being internalized so that the market takes it into account. Since we can be pretty much 100% sure there IS some cost, and it is at least on the order of the estimate we have at $26/ton this is a perfectly good way to send a signal to the market. In fact this is absolutely the most sure way to do that, and the proper way.

What is it about people that they are bound and determined to allow the energy companies to dump their waste product in your air and water, and then charge you for the privilege and keep the profit themselves? Excuse me, that's MY AIR.

Of course they won't ignore the impact on low income households. The problem is that a fix for one problem always creates another. You can subsidize the poor with taxes from the rich, but it's not a dollar for dollar proposition. Only a fraction of the tax revenue will actually end up in the hands of those needing the subsidy, and meanwhile the full impact of the tax will disproportionately reduce supply (of all energy, not just traditional). With less supply, it will be the poor and the middle income level that are proportionately impacted most in terms of standard of living. That's just an example, there are always unseen consequences to market interference.

I don't think very many people here actually have any sort of firm grasp of reality. Certainly people have done a very bad job of thinking all this through:

1) The cost, whatever it actually is, is being paid ALREADY. It is already being paid directly by the people in the form of environmental damage, crop damage, health care costs, etc.

2) The revenue raised is thus not actually 'revenue' at all, it is simply money that represents the above cost.

3) The consumers, since they are already paying the costs (point 1) won't be paying anything extra at all. They will simply be passed on the same costs by a different route.

The point is to do that, pass the costs on in a way that links them directly to the burning of the fossil fuels. That allows the existence of a choice. It makes us all MORE FREE because now we can choose. We can choose to pay in the form of carbon tax to offset the health care bill etc, OR we can choose to not burn the carbon in the first place and presumably pay the cost or some cost in the form of presumably more expensive renewable energy.

Of course there ARE benefits, besides the environmental benefit we'll have the benefit of money going into lowering the costs of these renewables. Eventually their cost will come down to par with (and maybe lower than) fossil fuels, at which point we've got a huge windfall because we're not paying any carbon tax AND we're not being dumped on.

That's the bottom line, freedom of choice, the power of the free market. What the HELL is the problem with all the righties around here? You guys need to think about this, you're arguing AGAINST what you actually stand for.

Inflation is where everything costs more.QE are pumping more money into the system.

Thats actually one and the same. By printing more money into the system the prices of everything else rises because the number of widgets has remained static but the number of paper dollars has increased. Usually the first widgets to respond are commodities and necessities, and this is exactly what we have observed with each round of QE, ahm, money printing.

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What other options does government have?

Govt should enforce level playing field, and not play favorites to too-big-to-fail, ahm, to-big-not-to-take-bribes-from. Excessive debt is what caused the problem. More debt will not solve it, only make it even worse which is exactly what we are observing.

Regarding carbon tax - its just another idea to transfer money into non-productive wall street pockets.

Printing money does not = inflation, if there is money sinks.Lets say there is 1 billion lost in the year printing money does not increase inflationLets say companies are putting away money at a hundred million a month, than you need to increase the funds to compensate for this.

Even so increasing money does not = inflation. Are people getting paid more to produce the widget? Do they have money to spend on more widgets? There is no supply side / demand side here. It is not getting in circulation to the people who spend the money, just paper money that makes balance sheets look nice.

Is there enough for people to do what they need with the money that is out there? Probably more than enough.

Look at the Money supply. It is crazy the amount that has been into the economy, yet....? Inflation? The Germany and Italian and Zimbabwe hyper inflation by having it pumped into the economy to pay foreigners that pay for war reparations or people having inflation proof jobs....etc...70's inflation is from the expectation of inflation being put into peoples jobs.

http://mises.org/daily/5978/The-Libertarian-Manifesto-on-Pollution If you haven't read the libertarian perspective on pollution control its a good read(especially on air pollution), whether you support it or not.

Yes, it is counter-factual, ludicrous even.

Look at the example of the waterways in this country. They're just dumping grounds? I think someone is badly misinformed. I dare you to go dump in your local waterway, go for it!

The idea that a "GM that owned the Mississippi River" would keep it clean is equally ludicrous. They would do whatever was profitable, and if that meant turning the river into a sewer that's exactly what would happen. Given that such an outcome would be much simpler it is hardly unlikely to be the result (said company would simply charge a tipping fee and/or simply vertically integrate and own the businesses doing the dumping). Given that enforcement of property rights is expensive and problematic, and produces nothing of value except jobs for lawyers, chances are the best business plan would be exactly turning it into a sewer, and since when do recreational uses of ANYTHING ever win out over business?

Their conception is also highly idealized. What is the actual likelihood that a "GM" would own a whole river? I find it highly unlikely. Far more likely is that ownership would be at best hopelessly tangled. In fact chances are not only would nobody own these waterways in any effective sense but there would of course be no fallback, no government to step in and take responsibility where all else fails.

The air pollution thing is equally ludicrous. I'd like to see you prove that your emphysema was caused by my power plant. No court in existence will give you standing to bring such a case. The idea that "the government has failed" is silly as well in context. The answer is to "use the courts" but what are the courts if not government? If the EPA didn't exist, and we could somehow achieve standing to sue for air pollution then who would insure that we had a fair court to have a hearing in? Who would insure that a judgment was rendered? ANY public process of government is equally corruptible. Either we can make the government work or all is lost, any other reasoning is feeble at best.

No, you misunderstand the terminology. The external cost of (untaxed) carbon emissions are born by society, who are not party to the transaction. This is normal use of 'externality' in environmental economics, and economics generally.

While 'externality' is commonly misused by environmentalists in the fashion you describe, externalities need third parties. Without a third party, there's no externality.

However, when you're talking about 'the coal industry', there effectively is no third party because you're ultimately one of their customers. In essence, environmentalists are trying to redefine the term in a way that removes any meaning from it - simply by existing, you impose all sorts of such 'externalities' on the rest of society.

While 'externality' is commonly misused by environmentalists in the fashion you describe, externalities need third parties. Without a third party, there's no externality.

It's not a misuse. Pollution is a classic negative externality in standard economics. Here's a negative externality: my electricity comes from a nearby hydroelectric dam. I'm not the recipient of power from coal, I don't pay to have it burned and it doesn't give me any energy in return. However, burning coal DOES impact me by, for example, making people sick (particulates, mercury, etc.) so they clog up hospitals in my region more often and drive up the cost of healthcare. I have to deal with the consequences of other people using power from coal. Coal is not the only example. Here's one using steel mills. Perhaps the Crackerjack box that conferred you your degree in economics did not go over how pollution doesn't respect the rights of neutral third parties and agrees to only pollute for both the customer and the seller, but in real life this is exactly how it works and economics has recognized this fact for a very long time. If you don't think this is so then you're simply not talking about real economics.

Money is what puts food on your table and keeps the lights on. Go talk to people living in primitive conditions in the Third World and see if they agree with your assessment of money being irrelevant.

It just seems irrelevant to you because you've spent your life coddled by systems that just work without you bothering to understand their nature. Your power, heat and sustenance seem to magically appear when in truth they are the products of a complex system operated by money.

Of course, the article itself has the same sort of magical thinking underlying it. Studies such as mentioned in the article are generally only correct by accident because there is absolutely no incentive for the authors to let honesty outweigh their bias - the result was determined by policy preferences rather than outcome.

Even when the incentives make it likely that the modelers are aiming for a legitimate result rather than an act of salesmanship, such studies are incredibly difficult to conduct properly.

evermor wrote:

If you have a computer, phone, tv, house/apartment, car, etc., and buy your clothes and food instead of producing them yourself, then you don't really believe what you're saying. Money is a factor to everyone, some just admit it more readily than others.

You both completely missed the point. There are things, such as survival of the species, that must be done regardless of the monetary cost. Pollution is one problem that must be dealt with. The trouble is, the solution to pollution if often sustainable energy systems that can't be metered and thus, cannot generate profit for energy companies. Things that cost more than they make, even though they would have a net benefit to preserving our ecosystem, are not going to happen because profit overrules human needs.

As to your argument on the relevance of money, however. Money does not grow your food. It does not produce your energy. It does not heat your home. Farmers grow food, and they do it because people need food. If people didn't need food, they wouldn't be farmers. Energy companies produce energy because people need energy. If people didn't use energy, they wouldn't need to produce it. The same goes with heat and other modern infrastructure. It exists because it's needed, not because of money. Money is actually a barrier. I can't have that food unless I have money. I can't have energy unless I have money. I can't live unless I have money. People starve in third world countries not because there isn't food, but because they are so poor that they can't afford it. There's more than enough food to feed them, but the money gets in the way. In the US, we waste 40% of the perfectly edible food we produce. That's food people that starving could have had, but we just throw it away because it won't sell.

SinclairZX81 wrote:

Well said, sir. I'm frequently boggled by people who actually try to say money and commerce are irrelevant or inherently evil, typed into their smartphone over their Jamaican latte, on their way to the grocery store.

I'm amazed that you somehow have powers of perception beyond natural human capacity to assert such a massive ad hominem fallacy. Your petty attempt at trying to find hypocrisy is way off base.

Of course I shop at the grocery store. Where else would I get my food living in a temperate zone? I can't grow food in the winter.

I don't like caffeinated beverages. I drink water, it's healthier.

I don't do something so stupid as type up comments on a smartphone. I use it for far more productive purposes.

Nevertheless, none of these things negate the validity of my previous comment. Nature doesn't give a shit about our abstract concept of money. If you don't follow the rules of nature, you die. It's a simple as that. If you keep pissing around the fact that it is mandatory that you change your behavior towards the environment, it will fail to sustain us. Cap and trade doesn't fix the issue. When the systems that sustain our existence have been depleted, can we eat our money? Will it shelter us? Can it heal the sick? Does it help us stay alive? The answer to all of these questions is, "no". So that means we need to stop playing games with our priceless natural resources, put aside our addiction to monetary gain, and come up with some real solutions that actually make real positive change instead of letting rich people play games with our future. Fuck the money, fix the problem because we must fix it or we die.

Ironically, you need money to research and implement all the things you are talking about.

Anyway, good luck at trying to live using barter systems or attempting to get essentials without returning something of value to the producers.

No, you don't. You really don't. When nature holds a gun to your head and tells you that if you don't solve this problem, you're going to die, do you complain you can't because you don't have the money? Does that make any logical sense? When your life is threatened, you don't make excuses why you can't defend yourself, you do whatever it takes to survive. But that's exactly what we're doing, making excuses. The problem is, that people just don't see the impending disaster because they're still focused on this game of musical chairs called capitalism. Well, the chairs are running out and we just refuse to stop playing. So, instead we just start a new game elsewhere (i.e. Cap and trade) to try to lull ourselves back into complacency.

You don't have to use any system of trade at all if you utilize technology to transition to a post-scarcity society and give up on this self-destructive concept of perpetual growth.

The only consequences are that other forms of power are suddenly competitive? I'm not trying to debate Global Warming or whatever, but that answer seems a bit too simple as well.

They become competitive because you've raised the cost of conventional power substantially, apparently out of concern that the poor will be affected by climate change but will be completely insensitive to substantially increasing the cost of living. Maybe it's just me, I don't get it.

Well, as far as that logic goes, the poor will also pay a disproportionate share of the costs caused by fossil CO2 driven climate change,

If we ignore the problem, everybody suffers (albeit not equally), if we deal with it, everybody benefits (again, albeit not equally).

So we can either deal with the problem, or obfuscate the issue by concern-trolling on the supposed behalf of the poor.

No, you misunderstand the terminology. The external cost of (untaxed) carbon emissions are born by society, who are not party to the transaction. This is normal use of 'externality' in environmental economics, and economics generally.

While 'externality' is commonly misused by environmentalists in the fashion you describe, externalities need third parties. Without a third party, there's no externality.

However, when you're talking about 'the coal industry', there effectively is no third party because you're ultimately one of their customers. In essence, environmentalists are trying to redefine the term in a way that removes any meaning from it - simply by existing, you impose all sorts of such 'externalities' on the rest of society.

This is complete nonsense. Being an end-user of electricity doesn't make you or me a (first or second) party to the upstream transactions (when coal is purchased by the generator, or when power is sold to the wholesaler, for example). The coal industry isn't a special case.

I recently sat in on an environmental economics seminar series at Cornell, and the professor provided us with this interesting article by Paul Krugman that was recently published in the New York Times Magazine. I think it nicely discusses some of the economic principles mentioned in this Ars article.

It's not a misuse. Pollution is a classic negative externality in standard economics. Here's a negative externality: my electricity comes from a nearby hydroelectric dam. I'm not the recipient of power from coal, I don't pay to have it burned and it doesn't give me any energy in return.

Externalities deal with local problems - where you have a specific transaction and a specific third party. At the global level, everyone is involved in the transactions and there is no third party - all the externalities disappear.

If you want to claim that the coal mine someone is building next to your house imposes a negative externality in the form of pollution, that's a proper use of the term. But you can't claim "your share" of a global negative externality because there is no such thing.

It's not a misuse. Pollution is a classic negative externality in standard economics. Here's a negative externality: my electricity comes from a nearby hydroelectric dam. I'm not the recipient of power from coal, I don't pay to have it burned and it doesn't give me any energy in return.

Externalities deal with local problems - where you have a specific transaction and a specific third party. At the global level, everyone is involved in the transactions and there is no third party - all the externalities disappear.

If you want to claim that the coal mine someone is building next to your house imposes a negative externality in the form of pollution, that's a proper use of the term. But you can't claim "your share" of a global negative externality because there is no such thing.

You seem to be splitting hairs. To what end? The spirit is there to make it applicable even by your definition.

He is affected by what happens and it costs him money, health and wellbeing that is not in the price of the goods sold by the first to the second parties.

You seem to be splitting hairs. To what end? The spirit is there to make it applicable even by your definition.

It's not 'splitting hairs'. What Wheel of Confusion is trying to do is use the conditions for one transaction to argue for an externality on another transaction. But the externality he's proposing doesn't exist. What he's actually talking about is the non-monetary cost at the global level.

The reason environmentalists commonly make this error is because they really want to argue that the costs of some forms of power are far more than they actually are. Unfortunately, reality gets in their way and they're forced to use the economic equivalent of division-by-zero to make such an argument.

"Big Coal" is not foisting the costs of their carbon dioxide generation on everyone, any more than your company is foisting the costs of air conditioning the office on you. You receive the benefits of the transactions and carry the costs in both examples.